Loophole could reduce some parent PLUS loans

Some parents struggling to repay federal Plus loans they used to put a child through college could get reduced payments and partial debt forgiveness using a loophole posted online Monday.

The loophole is described in an article posted on Fastweb.com by its publisher, Mark Kantrowitz. He says that it is narrow and that not many parents will squeeze through it, but those who do could see “meaningful relief.”

On a related note, reader Bill W. of Davis wants to know more about the tax consequences of student-loan forgiveness. “My daughter recently told me of the NIH’s loan repayment program, which may pay up to $35,000 of ‘qualified student loan debt’ each year. I am wondering if you are familiar with this program and can comment.”

I was not familiar with the National Institutes of Health loan repayment program, but according to its Web site, loan repayments made on a researcher’s behalf are taxable. However, the program will also make an additional payment to cover the researcher’s tax obligation. This payment is also taxable.

I bring this up as a warning that loan repayment and forgiveness programs might – or might not be – taxable to the borrower.

In a white paper, the Project on Student Debt says, “Current law treats forgiven or discharged student loan balances inconsistently.” For example, it is treated as nontaxable income if it was extinguished because a school closed before the student could complete the program or transfer, or under the public service loan forgiveness or TEACH grant program.

But it is considered taxable income if it is discharged because the borrower died or became totally and permanently disabled, or discharged after 20 or 25 years under the income-based or income-contingent payment programs.

Kantrowitz notes that if a parent Plus loan is discharged because the parent died, it’s tax free. But if it’s discharged because the student died, it’s taxable.

The project says most students cannot afford the tax on discharged debt and has urged lawmakers to waive it in all cases, regardless of the reason for the discharge.